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How IRS Inaction Stymies Abatement Requests

By Hale E. Sheppard, M.A., J.D., LL.M.

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Tax Section

When a taxpayer sends the IRS
a written request for an abatement of taxes, penalties, and/or
interest, she expects a response. The taxpayer’s expectations
are rooted in notions of fair play, common courtesy, and
logic. Based on these concepts, the taxpayer often assumes
that when the IRS does not answer her inquiry after a
reasonable period of time she is entitled to construe this
silence as a rejection. A corollary to this conclusion is that
if the IRS has effectively made its decision through inaction,
the taxpayer can seek immediate review by the U.S. Tax Court.
Unfortunately, that is not the case. This item examines a
recent case that demonstrates a taxpayer’s limited ability to
force the IRS’s hand when it comes to abatement requests.

Claims for Refund: Unique Taxpayer Rights and
Remedies

To better understand taxpayer limitations in
the context of requests for abatement, it is necessary to
understand that while requests for abatement of certain taxes,
interest, and/or penalties are in some ways similar to claims
for refund, they are distinct administrative devices. One
major difference between the two is that a taxpayer files a
claim for refund after she has already paid the
amounts in question, whereas she generally submits a request
for abatement before she has fully satisfied the
alleged liability. In both cases the amounts assessed by the
IRS were too high; it is mainly a matter of timing. The common
confusion about these two administrative mechanisms is further
compounded by the fact that, depending on the type of items at
issue, they are often filed on the same document, i.e., Form
843, Claim for Refund and Request for Abatement. Despite the
conceptual similarities and the frequent use of the same form,
requests for abatement and claims for refund are two entirely
different procedures, with separate rights and remedies.

The IRS may allow a claim for refund if the taxpayer has
overpaid (Sec. 6402(a)). The first step is for the taxpayer to
file a timely claim for refund (Sec. 6511(a)). If the IRS
formally denies the claim (in full or in part) by issuing a
notice of disallowance, then the taxpayer can seek immediate
help from the courts by initiating a suit for refund. The
taxpayer can also file a refund suit if the IRS simply fails
to respond to her claim within six months (Secs. 6532(a)(1),
7422(a)). Thus, the taxpayer has an immediate remedy if the
IRS either outright refuses to act or delays doing so for more
than six months. In the context of claims for refund, the law
dictates that a taxpayer can interpret the IRS’s silence as a
negative, which affords the taxpayer a large degree of control
over her tax destiny.

Requests for Abatement: Effect
of IRS Inaction

IRS inaction in response to an
abatement request, however, is not equivalent to a denial of
the request. This fact was recently confirmed by the Tax Court
in Ward, TC Memo 2007-374. In this case, the IRS
audited the Wards’ income tax returns for 1994 and 1995. After
concluding the audit, the IRS presented the Wards with the
proposed adjustments. On June 29, 1999, the taxpayers signed
Form 870-AD, Offer to Waive Restrictions on Assessment and
Collection of Tax Deficiency and to Accept Overassessment,
thereby agreeing to the assessment and collection of tax
deficiencies, late-filing penalties, and “interest as provided
by law.” Despite this concession, the Wards did not pay their
liability immediately. Therefore, the IRS ultimately issued
them a final pre-levy notice, alerting the taxpayers to their
right to request a collection due process (CDP) hearing before
the Service could proceed with its intended seizure of assets.
The Wards never requested a CDP hearing.

On or about
June 14, 2002, the Wards sent a letter to the IRS enclosing a
check for $22,000, directing the IRS to apply the payment “to
tax principal only” and requesting that the IRS accept the
check as full payment of their outstanding “tax principal” for
the relevant years. The letter contained the heading “Interest
& Penalty Abatement Request,” under which the Wards asked
the IRS to abate all penalties and interest related to 1994
and 1995 because of the financial hardships they were facing.
The letter further explained that the Wards were unaware when
they signed the Form 870-AD back in 1999 that penalties and
interest would continue to accrue until the liability had been
completely satisfied.

Approximately three years later,
on March 31, 2005, the IRS sent the Wards a letter addressing
the late filing penalties for 1995. The letter explained that
the IRS could not abate the penalties for that year because
the Wards had failed to satisfy the legal standard; that is,
they failed to demonstrate that there was reasonable cause for
failing to file their tax return in a timely manner. The
letter did not mention the Wards’ penalty abatement request
for 1994. It was also silent as to interest abatement for
either year.

On July 31, 2006, the Wards filed a
petition with the Tax Court seeking judicial review of the
IRS’s actions (or inactions) regarding their earlier letter
requesting abatement of penalties and interest. The Wards
raised two main arguments in support of their petition. They
first argued that the letter they sent to the IRS on or about
June 14, 2002, constituted a specific request for abatement of
penalties and interest for both 1994 and 1995. Thus, the IRS’s
failure to issue a final determination letter in response to
their request was the equivalent of a final determination
letter not to abate. The Wards argued, alternatively, that the
letter from the IRS dated March 31, 2005, was tantamount to a
denial, despite the fact that it failed to address all of the
penalties and interest in question.

In response, the
IRS filed a motion to dismiss for lack of jurisdiction. The
IRS argued that the reason set forth for abatement in the
Wards’ letter—financial hardship—is not an acceptable
rationale for abatement. Accordingly, the IRS did not issue a
final determination letter to the Wards under which they could
seek judicial review by the Tax Court.

In framing its
analysis, the court cited Sec. 6404(h)(1), which states:

The Tax Court shall have jurisdiction over any
action brought by a taxpayer who meets [certain net worth
requirements] to determine whether the [IRS’s] failure to
abate interest under this section was an abuse of
discretion, and may order an abatement, if such action is
brought within 180 days after the date of the mailing of the
[IRS’s] final determination not to abate such interest. (Emphasis
added.)

The Tax Court made short
shrift of the Wards’ first argument that the IRS’s refusal to
issue a final determination letter was, in effect, its final
determination. In rejecting the Wards’ contention, the court
looked to one of its earlier decisions. In Cho, TC
Memo 1998-363, the taxpayers filed a timely Form 843
requesting abatement of interest for 1992. Several months
passed and they received no response; therefore, the taxpayers
filed a petition with the Tax Court trying to invoke its
jurisdiction under Sec. 6404(h)(1). Approximately 20 days
later, the IRS sent the taxpayers a letter indicating that
their abatement request was being disallowed in full. The IRS
filed a motion to dismiss the taxpayers’ petition for lack of
jurisdiction. The crux of the Service’s argument in Cho
was that, as of the time that the taxpayers filed their
petition, the IRS had not made a final determination. Drawing
a parallel to the procedures for refund claims, the taxpayers
argued that the court should treat the IRS’s inaction as a
final determination to trigger jurisdiction. Put differently,
the taxpayers contended that the IRS should be required to
either grant or deny an abatement request within a reasonable
time and that silence on the matter should be construed as a
denial.

Although the Tax Court rejected the taxpayers’
theory in Cho, it did point out the inequities of the
situation. The court noted that, although notices of
deficiency (issued by the IRS under Sec. 6213(a)) and final
determination letters (issued by the IRS in response to
abatement requests under Sec. 6404) share many
characteristics, they have one major distinction. The IRS
generally must issue a notice of deficiency before assessing
taxes and may collect such taxes only after assessment.
Accordingly, the IRS is motivated to issue a notice of
deficiency as soon as possible. By contrast, abatement
requests ordinarily are filed after amounts have been assessed
(and possibly collected) by the IRS but not yet paid by the
taxpayer. Under these circumstances, the IRS may be less
inclined to act, particularly since it is not statutorily
required to do so. This nuance did not escape the court,
which, in discussing Sec. 6404(g) (which was redesignated as
Sec. 6404(h) in 1998), explained that change must be
accomplished at the congressional level, not the judiciary:

[The taxpayers’] argument has a certain
appeal, guaranteeing a taxpayer the right of judicial review
under Section 6404(g). However, in contrast to Section
6532(a) [which addresses claims for refund], Congress did
not provide a remedy within Section 6404(g) where the [IRS]
fails to act on a request for abatement of interest within a
reasonable time. Neither the plain language of Section
6404(g) nor the legislative history suggests a basis for
imposing a time limit within which the [IRS] is obliged to
act with respect to a request for abatement of interest.
Because the Court clearly lacks the authority to graft such
a time limit onto Section 6404(g), [the taxpayers’] remedy
lies with Congress, not with this Court.

The Tax Court also rejected the Wards’ alternative argument
that the IRS letter dated March 31, 2005, constituted a final
determination letter. The problem with this assertion, the Tax
Court explained, was that the letter gave no indication that
the IRS intended the letter—which addressed penalties for only
one year and completely ignored the interest issue for both
years—to be a final determination. Citing its earlier decision
in Bourekis, 100 TC 20 (1998), the Tax Court stated
that “a letter must be intended as a notice of final
determination not to abate interest under section 6404 to be
treated as such for jurisdictional purposes.”

Reflections

The lesson to be learned from Ward
is that the Tax Court does not have jurisdiction over
interest abatement cases until the IRS issues a final
determination letter, and the IRS has no statutory duty to
issue such a letter within a given time period.

It is
possible that this situation will change in the future. An
appellate court could overrule the Tax Court’s recent
decision, Congress could modify the law to give taxpayers the
right to judicial review after six months of IRS inaction in
cases of both claims for refund and requests for abatement, or
the Tax Court could hear a different case (with original legal
arguments and facts more favorable to the taxpayer) that
convinces it that the IRS’s failure to promptly exercise its
congressionally granted discretion is by itself an abuse of
discretion. Until then, taxpayers and tax practitioners should
be aware of Ward’simpact and adjust their strategies
accordingly.

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